Table of Contents





|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
D.C. 20549            
|                                  
|                                  
|                                  
|FORM 10-Q                         
|                                  
|                                  

|   |                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------
|þ  | QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009.          
|   |                                                                                                                                                  
|OR
|   |                                                                                                                                                  
|o  | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIODFROM __________ TO __________

Commission file number: 0-22187



RENAISSANCE
LEARNING, INC.(Exact name of Registrant as specified in its charter)

| |                                                 |  |                                     
| | ----------------------------------------------- |  | ------------------------------------
| | Wisconsin                                       |  | 39-1559474                          
| | (State
 or other jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)

2911 Peach Street 
P.O. Box 8036 
Wisconsin Rapids, Wisconsin (Address of principal executive
offices)

54495-8036 (Zip Code)

(715) 424-3636 (Registrants telephone number,
including area code)



Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No
 o

Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes o No o

Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One): Large
accelerated filer o Accelerated filer þ Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes o No þ

Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.

| |                                |       |            |  |                                | 
| | ------------------------------ | ----- | ---------- |  | ------------------------------ | 
| |                                | Class |            |  | Outstanding at 
 July 31, 2009 | 
| | Common
 Stock, $0.01 par value |       | 29,150,689 | 





---



RENAISSANCE LEARNING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

|                               |  |                                                                                                                 |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                 |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                                                
|                               |  |                                                                                                                 |  |     
|Item 1.                        |  | Financial Statements                                                                                            |  |     
|                               |  |                                                                                                                 |  |     
|                               |  | Condensed Consolidated Balance Sheets at June 30, 2009
 and 
 December 31, 2008                                 |  | 1   
|                               |  |                                                                                                                 |  |     
|                               |  | Condensed Consolidated Statements of Income for the
 Three Months 
 and Six Months Ended June 30, 2009 and 2008 |  | 2   
|                               |  |                                                                                                                 |  |     
|                               |  | Condensed Consolidated Statements of Cash Flows for
 the Six Months 
 Ended June 30, 2009 and 2008              |  | 3   
|                               |  |                                                                                                                 |  |     
|                               |  | Notes to
 Condensed Consolidated Financial Statements                                                           |  | 4   
|                               |  |                                                                                                                 |  |     
|Item 2.                        |  | Managements Discussion and Analysis
 of Financial 
 Condition and Results of Operations                        |  | 7   
|                               |  |                                                                                                                 |  |     
|Item 3.                        |  | Quantitative and Qualitative
 Disclosures About 
 Market Risk                                                   |  | 12  
|                               |  |                                                                                                                 |  |     
|Item 4.                        |  | Controls and Procedures                                                                                         |  | 13  
|                               |  |                                                                                                                 |  |     
|PART II - OTHER INFORMATION    |  |                                                                                                                
|                               |  |                                                                                                                 |  |     
|Item 1A.                       |  | Risk Factors                                                                                                    |  | 13  
|                               |  |                                                                                                                 |  |     
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  | 13  
|                               |  |                                                                                                                 |  |     
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                             |  | 14  
|                               |  |                                                                                                                 |  |     
|Item 6.                        |  | Exhibits                                                                                                        |  | 15  

---



Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RENAISSANCE LEARNING, INC.
AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)

|                                                                                                                          |  |                                                      |         |                    |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ------- | ------------------ | - | ------- | -
|                                                                                                                          |  | June 30,
 2009                                       |         | December 31,
 2008 |  
|                                                                                                                          |  | (In Thousands, Except Share and Per 
 Share Amounts) |        
|ASSETS                                                                                                                    |  |                                                      |         |                    |   |         |  
|Current assets:                                                                                                           |  |                                                      |         |                    |   |         |  
|Cash and cash equivalents                                                                                                 |  | $                                                    | 13,621  |                    | $ | 9,509   |  
|Investment securities                                                                                                     |  |                                                      | 3,629   |                    |   | 4,894   |  
|Accounts receivable, less allowance of $1,068 and
$1,090, respectively                                                    |  |                                                      | 12,966  |                    |   | 8,083   |  
|Inventories                                                                                                               |  |                                                      | 3,935   |                    |   | 5,504   |  
|Prepaid expenses                                                                                                          |  |                                                      | 1,380   |                    |   | 1,999   |  
|Income taxes receivable                                                                                                   |  |                                                      | 1,981   |                    |   | 3,301   |  
|Deferred tax asset                                                                                                        |  |                                                      | 4,183   |                    |   | 4,183   |  
|Other current assets                                                                                                      |  |                                                      | 100     |                    |   | 144     |  
|Total current assets                                                                                                      |  |                                                      | 41,795  |                    |   | 37,617  |  
|Investment securities                                                                                                     |  |                                                      | 1,942   |                    |   | 3,383   |  
|Property, plant and equipment, net                                                                                        |  |                                                      | 7,034   |                    |   | 8,621   |  
|Deferred tax asset                                                                                                        |  |                                                      | 2,749   |                    |   | 2,742   |  
|Goodwill                                                                                                                  |  |                                                      | 2,777   |                    |   | 2,750   |  
|Other intangibles, net                                                                                                    |  |                                                      | 1,038   |                    |   | 1,178   |  
|Capitalized software, net                                                                                                 |  |                                                      | 87      |                    |   | 174     |  
|Other non-current assets                                                                                                  |  |                                                      | 1,027   |                    |   | 461     |  
|Total assets                                                                                                              |  | $                                                    | 58,449  |                    | $ | 56,926  |  
|                                                                                                                          |  |                                                      |         |                    |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                      |  |                                                      |         |                    |   |         |  
|Current liabilities:                                                                                                      |  |                                                      |         |                    |   |         |  
|Accounts payable                                                                                                          |  | $                                                    | 2,347   |                    | $ | 1,712   |  
|Deferred revenue                                                                                                          |  |                                                      | 36,910  |                    |   | 43,975  |  
|Payroll and employee benefits                                                                                             |  |                                                      | 5,851   |                    |   | 3,981   |  
|Other current liabilities                                                                                                 |  |                                                      | 3,241   |                    |   | 3,284   |  
|Total current liabilities                                                                                                 |  |                                                      | 48,349  |                    |   | 52,952  |  
|Deferred revenue                                                                                                          |  |                                                      | 3,967   |                    |   | 2,950   |  
|Deferred compensation and other employee benefits                                                                         |  |                                                      | 1,488   |                    |   | 1,342   |  
|Income taxes payable                                                                                                      |  |                                                      | 4,868   |                    |   | 4,868   |  
|Other noncurrent liabilities                                                                                              |  |                                                      | 250     |                    |   | 133     |  
|Total liabilities                                                                                                         |  |                                                      | 58,922  |                    |   | 62,245  |  
|Shareholders equity:                                                                                                     |  |                                                      |         |                    |   |         |  
|Common stock, $.01 par; shares authorized:
150,000,000; issued:
 34,736,647 shares at June 30, 2009 and December 31, 2008 |  |                                                      | 347     |                    |   | 347     |  
|Additional paid-in capital                                                                                                |  |                                                      | 51,412  |                    |   | 51,735  |  
|Retained earnings                                                                                                         |  |                                                      | 42,452  |                    |   | 38,492  |  
|Treasury stock, at cost: 5,574,425 shares at June
30, 2009; 5,557,679
 shares at December 31, 2008                        |  |                                                      | (94,535 | )                  |   | (95,568 | )
|Accumulated other comprehensive loss                                                                                      |  |                                                      | (149    | )                  |   | (325    | )
|Total shareholders equity                                                                                                |  |                                                      | (473    | )                  |   | (5,319  | )
|Total liabilities and shareholders
equity                                                                                |  | $                                                    | 58,449  |                    | $ | 56,926  |  

See accompanying notes to condensed consolidated financial statements.

-1-

---



Table of Contents

RENAISSANCE LEARNING, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

|                                     |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|------------------------------------ |  | ---------------------------------------- | ------ | ---------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|                                     |  | Three
 Months 
 Ended June 30,           |        | Six
 Months 
 Ended June 30, |  
|                                     |  | 2009                                     |        | 2008                         |   | 2009   |  | 2008 |       
|                                     |  | (In Thousands, Except Per Share Amounts) |       
|                                     |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Net sales:                           |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Products                             |  | $                                        | 21,208 |                              | $ | 21,888 |  | $    | 41,870 |  | $ | 44,093 | 
|Services                             |  |                                          | 7,256  |                              |   | 6,159  |  |      | 15,465 |  |   | 13,340 | 
|Total net sales                      |  |                                          | 28,464 |                              |   | 28,047 |  |      | 57,335 |  |   | 57,433 | 
|Cost of sales:                       |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Products                             |  |                                          | 3,913  |                              |   | 3,964  |  |      | 6,910  |  |   | 7,999  | 
|Services                             |  |                                          | 2,445  |                              |   | 2,568  |  |      | 5,351  |  |   | 6,330  | 
|Total cost of sales                  |  |                                          | 6,358  |                              |   | 6,532  |  |      | 12,261 |  |   | 14,329 | 
|Gross profit                         |  |                                          | 22,106 |                              |   | 21,515 |  |      | 45,074 |  |   | 43,104 | 
|Operating expenses:                  |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Product development                  |  |                                          | 3,927  |                              |   | 4,268  |  |      | 8,378  |  |   | 8,301  | 
|Selling and marketing                |  |                                          | 8,403  |                              |   | 8,903  |  |      | 17,325 |  |   | 18,276 | 
|General and administrative           |  |                                          | 3,170  |                              |   | 3,429  |  |      | 6,633  |  |   | 7,557  | 
|Total operating expenses             |  |                                          | 15,500 |                              |   | 16,600 |  |      | 32,336 |  |   | 34,134 | 
|Operating income                     |  |                                          | 6,606  |                              |   | 4,915  |  |      | 12,738 |  |   | 8,970  | 
|Other income, net                    |  |                                          | 34     |                              |   | 172    |  |      | 183    |  |   | 340    | 
|Income before taxes                  |  |                                          | 6,640  |                              |   | 5,087  |  |      | 12,921 |  |   | 9,310  | 
|Income taxes                         |  |                                          | 2,510  |                              |   | 1,753  |  |      | 4,884  |  |   | 3,358  | 
|Net income                           |  | $                                        | 4,130  |                              | $ | 3,334  |  | $    | 8,037  |  | $ | 5,952  | 
|                                     |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Basic and Diluted earnings per share |  | $                                        | 0.14   |                              | $ | 0.11   |  | $    | 0.28   |  | $ | 0.21   | 
|                                     |  |                                          |        |                              |   |        |  |      |        |  |   |        | 
|Cash dividends declared per share    |  | $                                        | 0.07   |                              | $ | 0.07   |  | $    | 0.14   |  | $ | 0.14   | 

See accompanying notes to condensed consolidated financial statements.

-2-

---



Table of Contents

RENAISSANCE LEARNING, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(unaudited)

|                                                                            |  |                                     |        |      |   |        |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ------ | ---- | - | ------ | -
|                                                                            |  | For the Six Months Ended 
 June 30, |       
|                                                                            |  | 2009                                |        | 2008 |  
|                                                                            |  | (In
 Thousands)                     |       
|                                                                            |  |                                     |        |      |   |        |  
|Reconciliation of net income to net cash provided by operating
 activities: |  |                                     |        |      |   |        |  
|Net income                                                                  |  | $                                   | 8,037  |      | $ | 5,952  |  
|Adjustments to arrive at cash provided by operating
activities:             |  |                                     |        |      |   |        |  
|Depreciation and amortization                                               |  |                                     | 1,368  |      |   | 1,916  |  
|Amortization of investment
discounts/premiums                               |  |                                     | 27     |      |   | 57     |  
|Share-based compensation expense                                            |  |                                     | 798    |      |   | 619    |  
|Deferred income taxes                                                       |  |                                     | (7     | )    |   | 101    |  
|Excess tax benefits from share based payment
arrangements                   |  |                                     | (22    | )    |   | (26    | )
|Gain on sale of property                                                    |  |                                     | (108   | )    |   |       |  
|Change in assets and liabilities:                                           |  |                                     |        |      |   |        |  
|Accounts receivable                                                         |  |                                     | (4,883 | )    |   | (7,208 | )
|Inventories                                                                 |  |                                     | 1,569  |      |   | 1,197  |  
|Prepaid expenses                                                            |  |                                     | 619    |      |   | 289    |  
|Income taxes                                                                |  |                                     | 1,342  |      |   | (606   | )
|Accounts payable and other liabilities                                      |  |                                     | 2,579  |      |   | 1,693  |  
|Deferred revenue                                                            |  |                                     | (6,048 | )    |   | 980    |  
|Other                                                                       |  |                                     | (290   | )    |   | (252   | )
|Net cash provided by operating activities                                   |  |                                     | 4,981  |      |   | 4,712  |  
|                                                                            |  |                                     |        |      |   |        |  
|Cash flows from investing activities:                                       |  |                                     |        |      |   |        |  
|Purchase of property, plant and equipment                                   |  |                                     | (217   | )    |   | (609   | )
|Maturities/sales of investment securities                                   |  |                                     | 2,740  |      |   | 3,420  |  
|Capitalized software development costs                                      |  |                                     |       |      |   | (142   | )
|Net proceeds from sale of property                                          |  |                                     | 774    |      |   | 49     |  
|Net cash provided by investing activities                                   |  |                                     | 3,297  |      |   | 2,718  |  
|                                                                            |  |                                     |        |      |   |        |  
|Cash flows from financing activities:                                       |  |                                     |        |      |   |        |  
|Proceeds from exercise of stock options                                     |  |                                     |       |      |   | 348    |  
|Excess tax benefits from share-based payment
arrangements                   |  |                                     | 22     |      |   | 26     |  
|Dividends paid                                                              |  |                                     | (4,077 | )    |   | (4,063 | )
|Purchase of treasury stock                                                  |  |                                     | (111   | )    |   | (86    | )
|Net cash used by financing activities                                       |  |                                     | (4,166 | )    |   | (3,775 | )
|Net increase in cash and cash equivalents                                   |  |                                     | 4,112  |      |   | 3,655  |  
|Cash and cash equivalents, beginning of period                              |  |                                     | 9,509  |      |   | 7,337  |  
|Cash and cash equivalents, end of period                                    |  | $                                   | 13,621 |      | $ | 10,992 |  

See accompanying notes to condensed consolidated financial statements.

-3-

---



Table of Contents

RENAISSANCE LEARNING, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Consolidation

The condensed consolidated financial statements
include the financial results of Renaissance Learning, Inc. and our
subsidiaries.

2. Basis
of Presentation

The
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in our opinion, necessary for
a fair presentation of the results of the interim periods, and are presented on
an unaudited basis. These financial statements should be read in conjunction
with the financial information contained in our Annual Report on Form 10-K for
the year ended December 31, 2008 (2008 Annual Report), which is on file with
the U.S. Securities and Exchange Commission (the SEC). The results of
operations for the three and six month periods ended June 30, 2009 and 2008 are
not necessarily indicative of the results to be expected for the full year.

3. Earnings
Per Common Share

Basic
earnings per common share is computed by dividing net income by the weighted
average number of common shares and participating securities outstanding during
the period. Participating securities include unvested restricted shares and
restricted share units that have a nonforfeitable right to dividends or
dividend equivalents. Common shares and participating securities issued or
reacquired during the period are weighted for only the portion of the period
during which they were outstanding.

Diluted
earnings per common share has been computed based on the weighted average
number of common shares and other participating securities outstanding,
increased by the number of additional common shares that would have been
outstanding if the potentially dilutive stock option shares and
non-participating restricted shares and restricted share units had been issued.

The
weighted average shares outstanding are as follows:

|                                                        |  |                             |            |                           |  |            |  |      |            |  |  |            | 
|------------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                        |  | Three Months Ended June 30, |            | Six Months Ended June 30, | 
|                                                        |  | 2009                        |            | 2008                      |  | 2009       |  | 2008 |           
|Basic weighted
 average shares outstanding              |  |                             | 29,220,404 |                           |  | 29,084,238 |  |      | 29,201,153 |  |  | 29,063,748 | 
|Dilutive effect
 of outstanding stock options           |  |                             |           |                           |  | 3,738      |  |      |           |  |  | 3,513      | 
|Dilutive effect
 of non-participating restricted shares |  |                             | 16         |                           |  | 345        |  |      | 8          |  |  | 359        | 
|Diluted weighted
 average shares outstanding            |  |                             | 29,220,420 |                           |  | 29,088,321 |  |      | 29,201,161 |  |  | 29,067,620 | 

For
the three months ended June 30, 2009 and 2008, there were 681,301 and 781,895
shares subject to outstanding stock options, respectively, excluded from the
calculation of diluted earnings per share because their effect was
antidilutive. For the six months ended June 30, 2009 and 2008, there were
681,301 and 781,895 shares subject to outstanding stock options, respectively,
excluded from the calculation of diluted earnings per share because their
effect was antidilutive. These options could be dilutive in the future.

4. Comprehensive
Income

For
the quarters ended June 30, 2009 and 2008, comprehensive income was $4.3
million and $3.3 million, respectively. Total comprehensive income was $8.2
million and $5.9 million in the first six months of 2009 and 2008,
respectively. Our comprehensive income includes net income and foreign currency
translation adjustments.

5. Goodwill
and Other Intangible Assets

In
accordance with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, goodwill is not amortized and we are required to
assess goodwill at least annually for impairment by applying a fair value-based
test. Other intangibles consist of customer relationships acquired in
connection with the purchase of AlphaSmart, Inc. (AlphaSmart). The customer
relationships intangible is amortized over its useful life of ten years, on the
declining balance method.

-4-

---



Table of Contents

For
the three months ended June 30, 2009 and 2008, we recognized amortization
expense of $70,000 and $123,000, respectively. For the six months ended June
30, 2009 and 2008, we recognized amortization expense of $141,000 and $247,000,
respectively. Other intangibles consisted of the following:

|                       |  |                |       |                   |   |       |  |      |       |              |   |       |  |   |       |  |   |       | 
|---------------------- |  | -------------- | ----- | ----------------- | - | ----- |  | ---- | ----- | ------------ | - | ----- |  | - | ----- |  | - | ----- | 
|                       |  | June 30, 2009  |       | December 31, 2008 |  
|                       |  |                |       | Accumulated       |   |       |  |      |       | Accumulated  |   |       | 
|                       |  | Cost           |       | Amortization      |   | Net   |  | Cost |       | Amortization |   | Net   | 
|                       |  | (In Thousands) |      
|Customer relationships |  | $              | 3,200 |                   | $ | 2,162 |  | $    | 1,038 |              | $ | 3,200 |  | $ | 2,022 |  | $ | 1,178 | 

6. Recent
Accounting Pronouncements

In
December 2007, the FASB issued SFAS No. 141R, Business
Combinations, which replaces SFAS No. 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R was effective for us on
January 1, 2009 and applies prospectively to business combinations completed on
or after that date. Adoption of SFAS No. 141R did not affect our consolidated
financial statements.

In
December 2007, the FASB issued SFAS No. 160 Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest
holders. SFAS 160 was effective for us on January 1, 2009. Adoption of SFAS 160
did not affect our consolidated financial statements.

In
April 2008, the FASB issued FASB Staff Position (FSP) 142-3, Determination of the Useful Life of Intangible
Assets. FSP 142-3 intends to
improve the consistency between the useful life of a recognized intangible
asset under SFAS 142, Goodwill and Other
Intangible Assetsand the period of expected cash flows used to
measure the fair value of the asset under SFAS 141 (revised 2007), Business Combinations (SFAS 141R) and
other accounting principles generally accepted in the United States. FSP 142-3
was effective for us on January 1, 2009 and applies prospectively to intangible
assets acquired on or after that date. Adoption of FSP 142-3 did not affect our
consolidated financial statements.

In
June 2008 the FASB issued FASB Staff Position FSP EITF 03-6-1 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. FSP
EITF 03-6-1 requires that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation
of basic earnings per share. This FSP was effective for us on January 1, 2009
and also requires retroactive restatement of earnings per share for all prior
periods presented in the financial statements and footnotes. Adoption of FSP
EITF 03-6-1 did not have a material impact on our basic or diluted earnings per
share.

7. Share-Based
Compensation

There
were no options to purchase our common stock granted during the six months
ended June 30, 2009 and June 30, 2008. The exercise prices for all options are
equal to the fair market value of our common stock on the date the options were
granted.

Restricted
stock awards, consisting of restricted shares and restricted share units, are
granted to certain employees and our non-employee directors. For employees,
restricted stock awards generally vest over a period of four years and for
non-employee directors, upon termination of the individuals tenure on our
board. Restricted stock awards to employees are expensed over the vesting
period, and those made to our non-employee directors are expensed when granted.
We granted restricted stock awards for 67,170 shares during the six months
ended June 30, 2009, and granted restricted stock awards for 51,801 during the
six months ended June 30, 2008. We value restricted stock awards at the closing
market price of our common stock on the date of grant.

-5-

---



Table of Contents

A
summary of restricted stock award activity for the six months ended June 30,
2009 is as follows:

|                           |  |                                          |     |                                   |   |                            |  |   |       | 
|-------------------------- |  | ---------------------------------------- | --- | --------------------------------- | - | -------------------------- |  | - | ----- | 
|                           |  | Shares                                   |     | Weighted Average
 Value Per Share |   | Aggregate
 Intrinsic Value | 
|                           |  | (In Thousands, Except Per Share Amounts) |    
|                           |  |                                          |     |                                   |   |                            |  |   |       | 
|Balance at January 1, 2009 |  |                                          | 329 |                                   | $ | 13.57                      |  | $ | 2,960 | 
|Granted                    |  |                                          | 67  |                                   |   | 8.21                       |  |   |       | 
|Vested                     |  |                                          | (83 | )                                 |   | 10.74                      |  |   |       | 
|Forfeitures                |  |                                          | (2  | )                                 |   | 12.06                      |  |   |       | 
|Balance at June 30, 2009   |  |                                          | 311 |                                   | $ | 13.18                      |  | $ | 2,866 | 

As
of June 30, 2009, the total unearned compensation related to share-based
compensation awards, net of estimated forfeitures, was $2.2 million, which will
be amortized as expense over the weighted average remaining period of 2.5
years. Total share-based compensation was $0.8 million for the six months ended
June 30, 2009.

8. Fair
Value Measurements

Certain
of our assets and liabilities are reported at fair value in our consolidated
financial statements. Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157)
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. As presented in the tables below, this
hierarchy consists of three broad levels with level 1 inputs having the highest
priority, followed by level 2 and lastly, level 3. Level 1 inputs consist of
quoted prices in active markets for identical assets and liabilities. Level 2
inputs are other observable evidence of fair value, such as: quoted prices for
similar assets and liabilities or other market corroborated evidence of fair
value. Level 3 inputs are unobservable evidence of fair market value, such as:
a discounted cash flows model or other pricing model.

The
tables below provide fair value measurement information for these assets and
liabilities as of June 30, 2009 and 2008. The carrying values of cash and cash
equivalents, accounts receivable, and accounts payable (including income taxes
payable and accrued expenses), approximated fair value at June 30, 2009 and
2008 and accordingly those assets and liabilities are not presented in the
following tables.

|                                  |  |                  |       |                   |   |                               |  |                 |       |                 |   |     |  |   |   | 
|--------------------------------- |  | ---------------- | ----- | ----------------- | - | ----------------------------- |  | --------------- | ----- | --------------- | - | --- |  | - | - | 
|                                  |  | 2009             |      
|                                  |  |                  |       |                   |   | Fair Value Measurements Using | 
|(In
 Thousands)                   |  | Carrying
 Amount |       | Total Fair
 Value |   | Level 1
 Inputs               |  | Level 2
 Inputs |       | Level 3
 Inputs |  
|Current investment securities     |  | $                | 3,629 |                   | $ | 3,665                         |  | $               | 3,665 |                 | $ |    |  | $ |  | 
|Non-current investment securities |  |                  | 415   |                   |   | 415                           |  |                 |      |                 |   | 415 |  |   |  | 
|SERP liability                    |  |                  | 1,527 |                   |   | 1,527                         |  |                 | 1,527 |                 |   |    |  |   |  | 
|                                  |  |                  |       |                   |   |                               |  |                 |       |                 |   |     |  |   |   | 
|                                  |  | 2008             |      
|                                  |  |                  |       |                   |   | Fair Value Measurements Using | 
|(In
 Thousands)                   |  | Carrying
 Amount |       | Total Fair
 Value |   | Level 1
 Inputs               |  | Level 2
 Inputs |       | Level 3
 Inputs |  
|Current investment securities     |  | $                | 7,534 |                   | $ | 7,589                         |  | $               | 7,589 |                 | $ |    |  | $ |  | 
|Non-current investment securities |  |                  | 4,176 |                   |   | 4,212                         |  |                 | 3,712 |                 |   | 500 |  |   |  | 
|SERP liability                    |  |                  | 1,632 |                   |   | 1,632                         |  |                 | 1,632 |                 |   |    |  |   |  | 

9. Dividends

On
April 29, 2009, our Board of Directors declared a quarterly cash dividend of
$0.07 per share, payable June 1, 2009 to shareholders of record as of May 15,
2009.

10. Subsequent
Event

On
July 22, 2009, our Board of Directors declared a quarterly cash dividend of
$0.07 per share, payable September 1, 2009 to shareholders of record as of
August 7, 2009.

The
company has evaluated all subsequent events that occurred up to the time of the
companys issuance of its financial statements on August 10, 2009.

-6-

---



Table of Contents

Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations

Results
of Operations

Our
results of operations can be affected by many factors including the general
economic environment, state and federal government budgetary decisions, and the
length and complexity of the sales cycle for school districts. National trends,
federal and state legislation, Department of Education administrative policies,
and the way the foregoing align with our products and services can also impact
our business.

We
monitor several important issues which are significant to the evaluation of our
financial condition, operating results, business challenges and strategic
opportunities. Among the more important of these issues are:

| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Our success and trends in maintaining and
 expanding our customer base, particularly with respect to the Accelerated Readerproduct which
 accounts for approximately 40% of our sales;
| | (ii) The general state of K-12 educational funding
 in the United States; and                                                                                                             
| | (iii) The state of K-12 funding in certain large
 states, particularly California, Texas and Florida, which together make up
 about one-third of our total orders.                        

A
key part of our business strategy for maintaining and expanding our customer
base (and the related revenues) is to transition our traditional perpetual-license-based
customers to our newer subscription-based software products. Our
subscription-based products offer enhanced features which provide greater value
to our customers, thereby contributing to increased customer satisfaction. Our
most popular subscription-based products, the Enterprise
versions, include much greater access to product content. They also offer a
hosting option which makes implementation of our software much easier and
greatly reduces the costs both to our customers to implement and to us to
develop and support the software. Customers who transition to our Accelerated Reader Enterprise subscription-based
product to
date have increased their average spending approximately $1,000 more per year,
per school versus our customers using our perpetual-license products. Although
this amount of incremental revenue could change due to customer mix and other
factors including additional purchases of products and services, we expect that
we will continue to see incremental revenue as our customers transition to Accelerated Reader Enterprise. We have
also experienced an annual per customer revenue increase for our other
subscription-based products, but the increase has been most significant with
our Accelerated Reader Enterprise product.

We
believe the percentage of customers using the subscription-based Enterprise versions of our reading and
math products is an important indicator of the progress of this strategic
growth initiative and the magnitude of the growth opportunities still existing with
regard to this strategy. The percentage of customers using reading products is
more critical since the Accelerated Reader
is our most significant product and because we have experienced a greater
increase in per customer revenues from Accelerated
Reader Enterprise
subscription-based customers as compared to users of our other
subscription-based products. As of the end of the second quarter of 2009,
approximately 40% of our active reading product customers were using the Enterprise version as compared to
approximately 25% at the end of the second quarter of 2008.

Our
strategic transition to subscription-based software products has affected, and
will continue to affect, our results of operations. We believe that this
strategy has the potential to generate more lifetime revenue per customer than
selling software under a perpetual-license model. Revenues from
subscription-based software sales are not completely incremental to our results
as customers who make the transition no longer purchase annual support plans
for our perpetual-license products and those who purchase our most popular
subscription-based product, the Enterprise
version, also no longer purchase add-on content. Revenues under the
subscription-based model are composed of both software and services. The gross
profit margins from subscription-based software products are slightly higher
than our historical gross profit margins on sales of perpetual-license
software. In addition, the subscription-based software model tends to generate
a sales mix somewhat more heavily weighted towards services. In addition, the
services we sell with our subscription-based software products tend to have a
somewhat higher gross profit margin than those sold with our perpetual-license
software products.

The
transition to subscription-based products has increased the seasonality of
customer ordering patterns. Compared to orders for non-subscription-based
offerings, customer orders of our subscription-based offerings tend to more
closely follow school budgeting cycles resulting in a more seasonal order
pattern weighted to the second and, even more so, third calendar quarters.
Also, after customers convert to our most popular subscription-based products,
the Enterprise version, they no
longer order reading quizzes and math libraries since access to this content is
included in their subscription. Historically, our customers have ordered more
of this content in the first and fourth quarters. The combined effect is that a
much greater proportion of a years orders are expected in the second quarter
and to an even greater extent in the third quarter than we have experienced
historically.

-7-

---



Table of Contents

Transitioning
our customer base to subscription-based software can adversely impact orders
for add-on reading quizzes and math libraries by customers who own our software
under perpetual-license agreements, as some may delay purchases of add-on
content if they are contemplating converting to our Enterprise version subscription-based products.
Additionally, our subscription based products are often sold at the school
district level and district level sales tend to be more complex, have a longer
sales cycle, and are typically for a larger dollar amount than sales made to
individual schools. Orders from district sales are therefore more uneven and
more difficult to accurately predict than individual school level sales and,
therefore, the timing of large district sales can significantly impact
quarterly order levels.

The
transition to subscription-based products has increased the seasonality of
customer ordering patterns for software. However, as the transition to
subscription-based products has progressed, we have built substantial balances
of deferred subscription revenue. Since this deferred revenue is recognized
ratably over the subscription period (generally twelve months) it reduces the
volatility of our reported revenue. This means that revenues in a given period
are not necessarily indicative of the orders placed by our customers for our
products and services during a given period.

Customer
orders for our products decreased by approximately $3.9 million or 11%, in the
second quarter of 2009 compared to the second quarter of 2008. In addition to
the above factors, we believe that our second quarter 2009 orders were
negatively affected by educational funding issues. We believe many customers
delayed placing orders due to uncertainty about when federal funds from the
American Recovery and Reinvestment Act of 2009 will be available to them. In addition,
the extent of state budget shortfalls and the duration of the resulting effect
on educational funding are not clear at this time and may also have affected
order levels. Our customers in the states of California, Florida and Arizona
have been particularly affected by state budget issues. These three states
accounted for approximately 80% of the order decline we experienced in the
second quarter of 2009.

We
have implemented several cost savings initiatives including reducing laptop
selling costs, implementing a general hiring freeze, reducing product
development expenses related to some of our lower-performing product lines and
implementing other general non-payroll cost constraints. There was minimal
impact from these initiatives in the first quarter of 2009 because the savings
were offset by one-time severance and other charges. Savings from these
initiatives were approximately $0.8 million in the second quarter of 2009.

The
following table sets forth certain consolidated income statement data as a
percentage of net sales, except that individual components of costs of sales
and gross profit are shown as a percentage of their corresponding component of
net sales:

|                            |  |                              |       |                            |  |       |   |      |       |   |  |       |  
|--------------------------- |  | ---------------------------- | ----- | -------------------------- |  | ----- | - | ---- | ----- | - |  | ----- | -
|                            |  | Three Months Ended
 June 30, |       | Six Months Ended
 June 30, | 
|                            |  | 2009                         |       | 2008                       |  | 2009  |   | 2008 |      
|Net Sales:                  |  |                              |       |                            |  |       |   |      |       |   |  |       |  
|Products                    |  |                              | 74.5  | %                          |  | 78.0  | % |      | 73.0  | % |  | 76.8  | %
|Services                    |  |                              | 25.5  | %                          |  | 22.0  | % |      | 27.0  | % |  | 23.2  | %
|Total net sales             |  |                              | 100.0 | %                          |  | 100.0 | % |      | 100.0 | % |  | 100.0 | %
|Cost of sales:              |  |                              |       |                            |  |       |   |      |       |   |  |       |  
|Products                    |  |                              | 18.5  | %                          |  | 18.1  | % |      | 16.5  | % |  | 18.1  | %
|Services                    |  |                              | 33.7  | %                          |  | 41.7  | % |      | 34.6  | % |  | 47.4  | %
|Total cost of
 sales        |  |                              | 22.3  | %                          |  | 23.3  | % |      | 21.4  | % |  | 24.9  | %
|Gross profit:               |  |                              |       |                            |  |       |   |      |       |   |  |       |  
|Products                    |  |                              | 81.5  | %                          |  | 81.9  | % |      | 83.5  | % |  | 81.9  | %
|Services                    |  |                              | 66.3  | %                          |  | 58.3  | % |      | 65.4  | % |  | 52.6  | %
|Total gross
 profit         |  |                              | 77.7  | %                          |  | 76.7  | % |      | 78.6  | % |  | 75.1  | %
|Operating expenses:         |  |                              |       |                            |  |       |   |      |       |   |  |       |  
|Product
 development        |  |                              | 13.8  | %                          |  | 15.2  | % |      | 14.6  | % |  | 14.5  | %
|Selling and
 marketing      |  |                              | 29.5  | %                          |  | 31.8  | % |      | 30.2  | % |  | 31.8  | %
|General and
 administrative |  |                              | 11.2  | %                          |  | 12.2  | % |      | 11.6  | % |  | 13.2  | %
|Total operating
 expenses   |  |                              | 54.5  | %                          |  | 59.2  | % |      | 56.4  | % |  | 59.5  | %
|Operating income            |  |                              | 23.2  | %                          |  | 17.5  | % |      | 22.2  | % |  | 15.6  | %
|Other, net                  |  |                              | 0.1   | %                          |  | 0.6   | % |      | 0.3   | % |  | 0.6   | %
|Income before taxes         |  |                              | 23.3  | %                          |  | 18.1  | % |      | 22.5  | % |  | 16.2  | %
|Income taxes                |  |                              | 8.8   | %                          |  | 6.2   | % |      | 8.5   | % |  | 5.8   | %
|Net Income                  |  |                              | 14.5  | %                          |  | 11.9  | % |      | 14.0  | % |  | 10.4  | %

-8-

---



Table of Contents

Three
Months Ended June 30, 2009 and 2008

Net
Sales. Our net sales increased by $0.5 million, or
1.5%, to $28.5 million in the second quarter of 2009 from $28.0 million in the
second quarter of 2008. Orders were $3.9 million lower in the second quarter
2009 than in the second quarter 2008; however, lower orders were offset by the
recognition of $3.2 million more revenue from deferred revenue in 2009. The
remainder of the difference in revenue is attributable to changes in the
balance of our undelivered order backlog.

Product revenue
decreased by $0.7 million, or 3.1%, to $21.2 million in the second quarter of
2009 from $21.9 million in the second quarter of 2008. Product revenue declined
due to a $1.0 million decrease in hardware sales, partially offset by increases
in revenue recognized from deferred revenue related to software orders we
received in prior periods.

Service
revenue increased by $1.1 million, or 17.8%, to $7.3 million in the second
quarter of 2009 from $6.2 million in the second quarter of 2008. Nearly all
categories of service revenue improved in the quarter. The most significant
increases were in hosting and professional development which increased by $0.6
million and $0.3 million, respectively.

Cost
of Sales. Costs of sales of products decreased by $0.1
million, or 1.3%, to $3.9 million in the second quarter of 2009 from $4.0
million in the second quarter of 2008. As a percentage of product sales, the
cost of sales of products was relatively unchanged at 18.5% in the second
quarter of 2009, compared to 18.1% for the second quarter of 2008. The cost of
sales of services decreased to $2.4 million in the second quarter of 2009 from
$2.6 million in the second quarter of 2008, a decrease of 4.8% due to cost efficiencies
in our service business. As a percentage of sales of services, the cost of
sales of services decreased to 33.7% in the second quarter of 2009 from 41.7%
in the second quarter of 2008. Our cost of sales of services is relatively
fixed, especially with respect to our technical services and software support.
Therefore the increase in revenues combined with the relatively fixed nature of
the related costs was the primary reason for the improvement in the cost of
service sales as a percentage of sales.

Product
Development. Product development expenses decreased to
$3.9 million in the second quarter of 2009 from $4.3 million in the second
quarter of 2008, a decrease of 8.0%. The decrease in product development
expenses is due to the restructuring implemented earlier in the year. We closed
our office in India and reduced our product development staff in other offices
to better align our employee base with our product development needs and growth
areas. As a percentage of net sales, product development expenses decreased to
13.8% in the second quarter of 2009 from 15.2% in the second quarter of 2008.

Selling
and Marketing. Selling and marketing expenses
decreased by $0.5 million, or 5.6%, to $8.4 million in the second quarter of
2009 from $8.9 million in the second quarter of 2008. Selling expenses
decreased $0.3 million due to lower commissions caused by reduced order rates,
and marketing expenses decreased $0.2 million due to cost efficiencies in our
advertising programs. As a percentage of net sales, selling and marketing
expenses decreased to 29.5% in the second quarter of 2009 from 31.8% in the
second quarter of 2008.

General
and Administrative. General and administrative
expenses decreased to $3.2 million in the second quarter of 2009 from $3.4
million in the second quarter of 2008, a decrease of 7.5%. Approximately
one-half of the decrease in general and administrative expenses was from lower
salary and benefit costs due to our hiring freeze and personnel reductions with
the remaining decrease due to non-payroll cost constraints. As a percentage of
net sales, general and administrative expenses decreased to 11.2% in the second
quarter of 2009 from 12.2% in the second quarter of 2008.

Operating
Income. Operating income increased by $1.7 million, or 34.4%, to
$6.6 million in the second quarter of 2009 from $4.9 million in the second
quarter of 2008. The increase was due to the gross profit margin improvement
and decreased operating expenses as explained in more detail above. As a
percentage of net sales, operating income increased to 23.2% in the second
quarter of 2009 from 17.5% in the second quarter of 2008.

Income Tax.Income
tax expense of $2.5 million was recorded in the second quarter of 2009 at an
effective income tax rate of 37.8% of pre-tax income, compared to $1.8 million
that was recorded in the second quarter of 2008 at an effective income tax rate
of 38.0% of pre-tax income, less a tax benefit of $0.2 million relating to the
settlement of various state audit issues.

-9-

---



Table of Contents

Six
Months Ended June 30, 2009 and 2008

Net
Sales. Our net sales decreased by $0.1 million, or
0.2%, to $57.3 million in the first six months of 2009 from $57.4 million in
the first six months of 2008. Orders were $7.9 million lower in the first half
of 2009 than in the first half of 2008; however, lower orders were offset by
the recognition of $7.0 million more revenue from deferred revenue in 2009. The
remainder of the difference in revenue is attributable to changes in the
balance of our undelivered order backlog.

Product
revenue decreased by $2.2 million, or 5.0%, to $41.9 million in the first six
months of 2009 from $44.1 million in the same period in 2008. Product revenue
declined due to a $2.8 million decrease in hardware sales, partially offset by
increases in revenue recognized from deferred revenue related to software
orders we received in prior periods.

Service
revenue increased to $15.5 million in the first six months of 2009 from $13.3
million in the first six months of 2008, an increase of 15.9%. Nearly all
categories of service revenue were up except for professional development which
was relatively unchanged from the same period last year. The most significant
increases were in hosting and other technical services which increased by $1.3
million and $0.7 million, respectively.

Cost
of Sales. Cost of sales of products decreased by $1.1
million, or 13.6%, to $6.9 million in the first six months of 2009 from $8.0
million in the first six months in 2008. As a percentage of product sales, the
cost of sales of products was 16.5% in the first six months of 2009, compared
to 18.1% in the first six months of 2008. The reason for the improvement in
product cost of sales was the higher proportion of software in the 2009 sales
mix as compared to 2008, as our margins are higher on software than on
hardware. The cost of sales of services decreased to $5.4 million in the first
half of 2009 from $6.3 million in the first half of 2008, a decrease of 15.5%.
About 80% of the dollar decrease was due to savings from not holding a National
Conference in 2009 with the remainder attributable to cost efficiencies in our
other services, the cost of which is relatively fixed, especially with respect
to our technical services and software support. As a percentage of sales of
services, the cost of sales of services decreased to 34.6% in the first half of
2009 from 47.4% in the first half of 2008. The increase in revenues from our
hosting and technical services, explained above, which have higher margins than
our National Conference was the reason for the improvement.

Product
development.Product development expenses increased by
$0.1 million, or 0.9%, to $8.4 million in the first six months of 2009,
compared to $8.3 million for the first six months of 2008. As a percentage of
net sales, product development expenses were 14.6% in the first six months of
2009, similar to 14.5% for the first six months of 2008. The change in product
development expenses was primarily due to savings of approximately $0.3 million
in the second quarter of 2009 from our restructuring, offset by $0.1 million
less capitalized development expense in 2009 and the remainder mostly
attributable to the additional costs we incurred in the first quarter of 2009
to effect the restructuring.

Selling and
Marketing.Selling and marketing expenses decreased by $1.0 million,
or 5.2%, to $17.3 million in the first six months of 2009, compared to $18.3
million for the first six months of 2008. Selling expenses decreased $0.6
million due to lower commissions caused by reduced order rates, and marketing
expenses decreased $0.4 million due to cost efficiencies in our advertising
programs. As a percentage of net sales, selling and marketing expenses
decreased to 30.2% in the first six months of 2009 from 31.8% in the first six
months of 2008.

General and
Administrative.General and administrative expenses decreased to
$6.6 million in the first six months of 2009 from $7.6 million in the first six
months of 2008, a decrease of 12.2%. General and administrative expenses
decreased primarily due to $0.4 million of fees incurred in the prior year to
cancel some future professional development events, with the remainder primarily
attributable to staffing reductions made in 2009. As a percentage of net sales,
general and administrative expenses decreased to 11.6% in the first half of
2009 from 13.2% in the first half of 2008.

Operating
Income.Operating income increased to $12.7 million in the first six
months of 2009 from $9.0 million in the same period in 2008, an increase of
42.0%. As a percentage of net sales, operating income increased to 22.2% in the
first half of 2009 from 15.6% in the first half of 2008. The increase was due
to the gross profit margin improvement and decreased operating expenses as
explained in more detail above.

Income
Tax Expense.Income tax expense of $4.9 million was
recorded in the first half of 2009 at an effective income tax rate of 37.8% of
pre-tax income. This compares to income tax expense of $3.4 million that was
recorded in the first half of 2008 at an effective income tax rate of 38.0% of
pre-tax income, less a tax benefit of $0.2 million relating to the settlement
of various state audit issues.

-10-

---



Table of Contents

Liquidity
and Capital Resources

As
of June 30, 2009, our cash, cash equivalents and investment securities were
$19.2 million, up $1.4 million from $17.8 million at December 31, 2008. The
increase was primarily due to $5.0 million of cash flow provided by operations
offset by $4.1 million used to pay dividends.

As
of June 30, 2009 we have a $15.0 million secured revolving line of credit
with a bank which is available until July 1, 2010. The line of credit bears
interest at either a floating rate or a fixed rate for a period of up to
90 days based on LIBOR plus 1.5%. The rate is at our option and is
determined at the time of borrowing. We also have a $2.0 million unsecured
revolving line of credit with a bank available until April 30, 2010 which
bears interest at the prime rate. As of June 30, 2009, the lines of credit had
not been used.

On
April 17, 2002, our Board of Directors authorized the repurchase of up to
5,000,000 shares of our common stock; on February 9, 2005, our Board of
Directors authorized the repurchase of an additional 3,000,000 shares and; on
February 6, 2008, our Board of Directors authorized the repurchase of an
additional 1,000,000 shares under the stock repurchase program. No time limit
was placed on the duration of the repurchase program, nor is there any dollar
limit on the program. We repurchase shares on the open market as well as from
employees who elect to surrender shares at the time of vesting to pay their
payroll withholding taxes. Repurchased shares will become treasury shares and
may be used for stock-based employee benefit plans, equity compensation plans
and, for other general corporate purposes. From January 1, 2009 through June
30, 2009, we repurchased approximately 12,600 shares at a cost of $111,000.
Since the original authorization of the repurchase program in 2002, we have
repurchased approximately 7.8 million shares at a cost of $135.1 million.
Depending on our stock valuation, cash availability and other factors, we may
repurchase additional shares as a beneficial use of our cash to enhance
shareholder value.

We
paid quarterly cash dividends of $0.07 per share in each of the four quarters
of 2008 along with a special dividend of $0.75 per share in the fourth quarter
of 2008. In the first and second quarter of 2009 we paid a cash dividend of
$0.07 per share. On July 22, 2009, our Board of Directors declared a quarterly
cash dividend of $0.07 per share, payable September 1, 2009 to shareholders of
record as of August 7, 2009.

We intend
to continue to pay quarterly cash dividends, subject to capital availability
and a determination that cash dividends continue to be in the best interests of
the company and our shareholders. Our Board of Directors also
considers several additional factors when declaring dividends, including: the
companys financial statements as of the most recent practicable date, the
expected cash costs to deliver the products and services sold and recorded as
deferred revenue, the companys ability to provide the products and services
underlying the amounts recorded as deferred revenue, the likelihood of
recognizing amounts recorded as deferred revenue as net sales based on the
companys historical experience and most recent projections and the short time
period over which such recognition has historically occurred and is expected to
occur and, other information, opinions, reports and statements prepared and
presented by the companys officers and employees about the companys business,
operations and financial condition.

We
believe our strong cash position coupled with cash flow from operations will be
sufficient to meet both our short-term and long-term working capital
requirements.

Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations

We
do not have any off-balance sheet transactions, arrangements or obligations
(including contingent obligations), that would have a material effect on our
financial results.

Operating
Leases. We enter into operating leases, primarily for
facilities that we occupy in order to carry out our business operations. We
utilize operating leases for some of our facilities to gain flexibility as
compared to purchasing facilities outright and to limit our exposure to many of
the risks of owning commercial property, particularly with regard to
international operations. These agreements are generally for terms of one to
five years. Some of the leases have early termination clauses, but they generally
cannot be terminated by either the lessor or us for reasons other than breach
of the lease agreement. We do not anticipate the early termination of any
significant lease agreement.

Purchase
Obligations. We enter into commitments with certain suppliers
to purchase our hardware products, such asNeo laptops, AccelScan scanners and the 2Know!
response system. The majority of these obligations will be satisfied within one
year.

-11-

---



Table of Contents

Tax
Audit Settlements and Deposits. Currently we do not
anticipate making any significant cash payments related to the settlement of
tax audits or deposits for unsettled audit issues. Estimation of the amounts
and timing of payments in periods after 2009 are highly uncertain and therefore
are not included in the table.

As
of June 30, 2009, our approximate contractual obligations for operating leases,
tax audit payments and purchase obligations (by period due) were as follows:

|                            |  |       |       |                   |                        |            |  |            |       |                    |   |     |  |   |    | 
|--------------------------- |  | ----- | ----- | ----------------- | ---------------------- | ---------- |  | ---------- | ----- | ------------------ | - | --- |  | - | -- | 
|Contractual
 Obligations    |  |       |       |                   | Payments Due by Period |           
|(In Thousands)              |  | Total |       | Less than
 1 year |                        | 1-3
 years |  | 3-5
 years |       | More than
 5 years |  
|Operating lease obligations |  | $     | 3,680 |                   | $                      | 773        |  | $          | 1,885 |                    | $ | 934 |  | $ | 88 | 
|Purchase obligations        |  |       | 4,781 |                   |                        | 4,768      |  |            | 13    |                    |   |    |  |   |   | 
|Total                       |  | $     | 8,461 |                   | $                      | 5,541      |  | $          | 1,898 |                    | $ | 934 |  | $ | 88 | 

Critical Accounting Policies and Estimates

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
judgments, estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates. There have been no significant changes to our critical
accounting policies that were disclosed in our 2008 Annual Report.

Forward-Looking Statements

In
accordance with the Private Securities Litigation Reform Act of 1995, we can
obtain a safe-harbor for forward-looking statements by identifying those
statements and by accompanying those statements with cautionary statements
which identify factors that could cause actual results to differ materially
from those in the forward-looking statements. Accordingly, the foregoing
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the following Quantitative and Qualitative Disclosures About
Market Risk may contain certain forward-looking statements regarding strategic
growth initiatives, growth opportunities and managements expectations
regarding orders and financial results for 2009 and future periods. These
forward-looking statements are based on current expectations and current
assumptions which management believes are reasonable. However, these statements
involve risks and uncertainties that could cause actual results to differ
materially from any future results encompassed within the forward-looking
statements. Factors which may cause such a difference to occur include: (i) the
failure of Accelerated Reader Enterprise,
Accelerated Math Enterprise and
laptop orders to achieve expected growth targets, (ii) a decline in reading
quiz and math library sales that exceeds expectations, (iii) risks associated
with our strategic growth initiative involving our transition to
subscription-based products, (iv) dependence on educational institutions and
government funding and (v) other risks affecting our business as described in
our filings with the Securities and Exchange Commission, including our 2008
Annual Report on Form 10-K and later filed quarterly reports on Form 10-Q and
current reports on Form 8-K, which factors are incorporated herein by
reference. We expressly disclaim a duty to provide updates to forward-looking
statements, whether as a result of new information, future events or other
occurrences.

Item 3. Quantitative and Qualitative Disclosures About Market
Risk

Interest
Rate Risk. Our exposure to market interest rate risk
consists of: (i) the increase or decrease in the amount of interest income we
can earn on our investment portfolio and (ii) the decrease or increase in the
value of our investment security portfolio if market interest rates increase or
decrease, respectively. We anticipate that we will have sufficient liquidity to
hold our investments to maturity; therefore, we do not expect to recognize any
material losses or gains related to an increase or decrease in market interest
rates.

Market
Risk.Our exposure to market risk relates to the
quality of the holdings in our investment security portfolio. The fair market
value of our investments is subject to increases or decreases in value
resulting from the performance of the securities issuer, from upgrades or
downgrades in the creditworthiness of the securities issuer, upgrades or
downgrades in the creditworthiness of the insurer of the securities, and from
changes in general market conditions.

-12-

---



Table of Contents

We
seek to manage our exposure to market risk by investing in accordance with our
corporate investment policy as established by our Board of Directors. The goals
of the policy are: (i) preservation of capital, (ii) provision of adequate
liquidity to meet projected cash requirements, (iii) minimization of risk of principal
loss through diversification and (iv) maximization of yields in relationship to
the guidelines, risk, market conditions and tax considerations.

Our
investment policy permits investments in obligations of the U.S. Treasury
department and its agencies, money market funds and, high quality
investment-grade corporate and municipal interest-bearing obligations. The
policy requires diversification to prevent excess concentration of issuer risk
and requires the maintenance of minimum liquidity levels. The policy precludes
investment in equity securities except for the specific purpose of funding the
obligations related to our Supplemental Executive Retirement Plan. As of June
30, 2009, our investment securities had a market value of approximately $5.6
million and a carrying value of $5.6 million. Due to the type and duration of
our investments, we do not expect to realize any material gains or losses
related to market risk.

Foreign
Currency Exchange Rate Risk. The financial position
and results of operations of our foreign subsidiaries are measured using local
currency. Revenues and expenses of such subsidiaries have been translated into
U.S. dollars using average exchange rates prevailing during the period. Assets
and liabilities have been translated at the rates of exchange on the balance
sheet date. We use the historical exchange rates published by the OANDA
Corporation for these translations. Translation gains or losses are deferred as
a separate component of shareholders equity. Aggregate foreign currency
transaction gains and losses are included in determining net income. As such,
our operating results are affected by fluctuations in the value of the U.S.
dollar compared to the British pound, Canadian dollar and the Euro. At this time,
foreign exchange rate risk is not significant due to the relative size of our
foreign operations and revenues derived from sales in foreign currencies.

Item 4. Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating our disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management was necessarily
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

As
of June 30, 2009, an evaluation was performed under the supervision and with
the participation of management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the SEC.

There
has been no change in our internal control over financial reporting that has
occurred during the quarter ended June 30, 2009 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

Part II - OTHER INFORMATION

Item 1A. Risk Factors

There
have been no material changes from risk factors previously disclosed in our
2008 Annual Report in response to Item 1A to Part I of Form 10-K.

Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

On
April 17, 2002, our Board of Directors authorized a repurchase program which
provides for the repurchase of up to 5,000,000 shares of our common stock. On
February 9, 2005, our Board of Directors authorized the repurchase of an
additional 3,000,000 shares under the stock repurchase program. On February 6,
2008, our Board of Directors authorized the repurchase of an additional
1,000,000 shares under the stock repurchase program.

-13-

---



Table of Contents

No
time limit was placed on the duration of the repurchase program, nor is there
any dollar limit on the program. We repurchase shares on the open market as
well as from employees who elect to surrender shares at the time of vesting to
pay their payroll withholding taxes. Repurchased shares will become treasury
shares and may be used for equity compensation plans, stock-based employee
benefit plans and for other general corporate purposes.

The
following table shows information relating to the repurchase of shares of our
common stock during the three months ended June 30, 2009:

|           |  |                                    |       |                               |   |                                                                                      |  |                                                                                   |       |  |  |           | 
|---------- |  | ---------------------------------- | ----- | ----------------------------- | - | ------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------- | ----- |  |  | --------- | 
|Period     |  | Total Number
 of Shares
 Purchased |       | Average Price
 Paid per Share |   | Total Number of
 Shares Purchased as
 Part of Publicly
 Announced Plans or
 Programs |  | Maximum Number of
 Shares that May Yet Be
 Purchased Under the Plans
 or Programs |      
|April 1-30 |  |                                    | 8,602 |                               | $ | 9.17                                                                                 |  |                                                                                   | 8,602 |  |  | 1,222,846 | 
|May 1-31   |  |                                    | 379   |                               |   | 8.74                                                                                 |  |                                                                                   | 379   |  |  | 1,222,467 | 
|June 1-30  |  |                                    |      |                               |   |                                                                                     |  |                                                                                   |      |  |  | 1,222,467 | 
|Total      |  |                                    | 8,981 |                               | $ | 9.15                                                                                 |  |                                                                                   | 8,981 |  |  |           | 

Item 4. Submission of Matters to a Vote of
Security Holders

|    |                                                                                                                                        |                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On April 29,
 2009, the Company held its Annual Meeting of Shareholders.                                                              
|    |                                                                                                                                       
|(b) | Not
 applicable.                                                                                                                      
|    |                                                                                                                                       
|(c) | Set forth
 below is a description of the proposals voted upon at the Annual Meeting of
 Shareholders and the results of the proposals.
|    |                                                                                                                                       
|    | 1.                                                                                                                                     | Seven
 directors were elected to serve until the 2010 Annual Meeting of Shareholders
 and until their successors are elected and qualified. The results of this
 proposal are as follows:

|                            |  |     |            |          |  |        | 
|--------------------------- |  | --- | ---------- | -------- |  | ------ | 
|                            |  | For |            | Withheld | 
|(1) Judith
 A. Paul         |  |     | 27,251,378 |          |  | 31,220 | 
|(2) Terrance
 D. Paul       |  |     | 27,251,506 |          |  | 31,092 | 
|(3) John H.
 Grunewald      |  |     | 27,249,672 |          |  | 32,926 | 
|(4) Gordon
 H. Gunnlaugsson |  |     | 27,251,555 |          |  | 31,043 | 
|(5) Harold
 E. Jordan       |  |     | 27,251,811 |          |  | 30,787 | 
|(6) Addison
 L. Piper       |  |     | 27,251,140 |          |  | 31,458 | 
|(7) Mark D.
 Musick         |  |     | 27,251,555 |          |  | 31,043 | 

|   |                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|2. | The
 appointment of Deloitte & Touche LLP as the Companys independent
 auditors for 2009 was ratified. The results of this proposal are as follows:

For:   27,249,615
          Against:   27,867
          Abstain:    5,116

|    |                 
|--- | ----------------
|(d) | Not
 applicable.

-14-

---



Table of Contents

Item 6. Exhibits

Exhibits.

| |             |      |             |                                                                                                                                                                        
| | ----------- | ---- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit No. |      | Description
|
| |             | 10.1 |             | Second
 Agreement to Credit Agreement and Revolving Line of Credit Note dated as of
 July 1, 2009 by and between Wells Fargo Bank, National Association and
 Registrant
| |             |      |             |                                                                                                                                                                        
| |             | 31.1 |             | Section 302
 certification by Terrance D. Paul                                                                                                                         
| |             |      |             |                                                                                                                                                                        
| |             | 31.2 |             | Section 302
 certification by Mary T. Minch                                                                                                                            
| |             |      |             |                                                                                                                                                                        
| |             | 32.1 |             | Section 906
 certification by Terrance D. Paul                                                                                                                         
| |             |      |             |                                                                                                                                                                        
| |             | 32.2 |             | Section 906
 certification by Mary T. Minch                                                                                                                            
| |             |      |             |                                                                                                                                                                        

-15-

---



Table of Contents

SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

| |                  |  |                                                             | 
| | ---------------- |  | ----------------------------------------------------------- | 
| |                  |  | RENAISSANCE
 LEARNING, INC. 
 (Registrant)                 
| |                  |  |                                                             | 
| | August 10,
 2009 |  | /s/ Terrance
 D. Paul                                       | 
| | Date             |  | Terrance D.
 Paul                                           | 
| |                  |  | Chief
 Executive Officer and a Director                    
| |                  |  | (Principal
 Executive Officer)                             
| |                  |  |                                                             | 
| |                  |  |                                                             | 
| | August 10,
 2009 |  | /s/ Mary T.
 Minch                                          | 
| | Date             |  | Mary T.
 Minch                                              | 
| |                  |  | Senior Vice
 President-Finance, Chief Financial Officer and
| |                  |  | Secretary
 (Principal Financial and Accounting Officer)    
| |                  |  |                                                             | 

---



Table of Contents

Index to Exhibits

|            |      |             |                                                                                                                                                                         | 
|----------- | ---- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|Exhibit No. |      | Description |                                                                                                                                                                        
|            |      |             |                                                                                                                                                                        
|            | 10.1 |             | Second
 Amendment to Credit Agreement and Revolving Line of Credit Note dated as of
 July 1, 2009 by and between Wells Fargo Bank, National Association and
 Registrant
|            |      |             |                                                                                                                                                                        
|            | 31.1 |             | Section 302
 certification by Terrance D. Paul                                                                                                                         
|            |      |             |                                                                                                                                                                        
|            | 31.2 |             | Section 302
 certification by Mary T. Minch                                                                                                                            
|            |      |             |                                                                                                                                                                        
|            | 32.1 |             | Section 906
 certification by Terrance D. Paul                                                                                                                         
|            |      |             |                                                                                                                                                                        
|            | 32.2 |             | Section 906
 certification by Mary T. Minch                                                                                                                            
|            |      |             |                                                                                                                                                                        

---